Wednesday, September 3, 2008

Eli Lilly Signs R&D Pact With Covance

In a move aimed at delivering new medicines to market more quickly and cheaply, Eli Lilly & Co. struck a $1.6 billion deal with drug-development service company Covance Inc., which will buy one of Lilly's research-and-development facilities for $50 million as part of the agreement.

Lilly hopes Covance's expertise in conducting drug trials will shave months off the Indianapolis drug maker's early-stage product-development timeline, which could help it make faster decisions about whether to kill a compound or prioritize its development. A "significant" portion of Lilly's pre-clinical safety testing work -- which involves animals, not humans -- will be done by Covance from now on, according to Andrew Dahlem, chief operating officer of Lilly's R&D division.

The companies, which have had a long-standing relationship, announced the agreement Wednesday. Lilly Chief Executive John Lechleiter said the new 10-year contract with Covance means the Princeton, N.J., company "will continue to work with us...in a process of reducing our cycle times, particularly early-stage cycle times, measurably."

The hand-off to Covance of a 600,000-square-foot R&D facility in Greenfield, Ind., which was operating at only about half its capacity, will allow Lilly to reduce its fixed costs as well.

In similar agreements also announced Wednesday, Lilly is also transferring U.S. clinical-trial monitoring work to Quintiles, a pharmaceutical-services company, and data management to i3, a clinical-research organization.

Contract research businesses such as Covance conduct many clinical trials and focus on improving efficiency at every step of the process. They can accelerate execution of early-stage testing by 20% to 30% -- or about two to four months -- and can speed enrollment in human clinical trials by 6-12 months, according to Chuck Farkas, head of consulting firm Bain & Co.'s North American Healthcare Practice, which has conducted extensive research on drug-development cycle times.

Lilly's decision to move beyond simply contracting with Covance "sets the stage" for other companies to do so as well, says Eric Coldwell, a health-care business analyst at Robert W. Baird & Co.

This deal and the growing amount of outsourcing in the industry may also indicate more broadly that major drug makers are scrutinizing their "large, disjointed and bureaucratic operations" and "rethinking what their internal infrastructure and expense structures look like," Mr. Coldwell says.

He adds that in the long run, it may mean that pharmaceutical companies become more focused on being "the financier that aggregates data and markets data" rather than the entity that internally develops drugs.

Drug makers have been trying desperately to develop innovative medicines at a time when many companies are facing looming patent expirations on blockbuster drugs and struggling with their drug pipelines. Another issue facing major drug companies is the pricing of their drugs. Many drug companies have been investigated for inflating average sales price in an illegal practice known false average sales price or drg false claims. Lilly experienced a setback in June when the Food and Drug Administration decided it needed three more months before making a decision about the company's blood thinner prasugrel, which Lilly is hoping will be a big seller.

About 600 Lilly employees will be affected by the Greenfield facility's sale, according to Mr. Lechleiter. Some will go to Covance to continue working on drug trials while others may take alternative positions at Lilly.